Tuesday, March 4, 2008

Long Suffering Trina Solar (TSL) Finally Gets Some Relief

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I've cut back my solar exposure quite heavily in the past month, but still hold my long suffering Trina Solar (TSL) - one of the fund's two largest losers from inception. We have an earnings report out this morning and it looks pretty solid, but truth be told this name has been so devastated I think if they simply said we are not going out of business it would of rallied to some degree. The chart is still a complete and utter mess and I am not that bullish on the sector as a whole right now, but it's nice to see some bounce in Trina's broken gait. I have to spend some time looking over the report, but the key with Trina has been getting in house cell processing to a much higher percentage to improve gross margins, which they seem to have achieved by processing 75%+ in house. Gross margins were surprisingly great at 27.3%. This shows their model is working despite huge ramps in polysilicon spot pricing, and effectively makes them the market leader in gross margin (for this quarter at least) among the PV panel markets. This is one of my favorite metrics in any industry, but especially solar. They do expect this to reduce to 23-25% in Q1 2008 but this puts them in the elite strata among peers. This gross margin expansion fed down to operating margin which doubled from 8.2% to 16.0% from last quarter (when gross margins were in the 20%s) - shows you the power of gross margin; it makes a lot of other ills disappear.

Trina had half its sales to Spain this quarter which is good and bad. Good for now because Spain is offering the best incentives in the world. Unfortunately, these incentives get reduced later in year 2008. They do look to be reducing this reliance on Spain later in the year, per guidance offered. They also offer a nice roadmap on efficieny improvements, and reductions in wafer thickeness (all money savers). Frankly, on first glance this is a hoard of good news, and the stock (in a better market) would be up more than the 9-10% it is. Technically, the stock faces resistance of the 50 day moving average of $38, so my initial thought before listening to conference call is lighten up at that level, and then if the stock shows enough strength to break through, I will simply buy back the shares. But in this type of market the more likely scenario is a stock fails to break through big resistance levels. Unfortunately the stock has not even made it to $37 yet. :)
  • The Chinese solar company's net income more than tripled to $15.7 million, or 62 cents per share, from $4.6 million, or 28 cents per share. Revenue climbed to $101.4 million from $38.8 million. Analysts polled by Thomson Financial expected much smaller earnings of 49 cents per share on revenue of $95.6 million.
  • During the quarter, Trina boosted its production capacity, shipped nearly three times as many systems and expanded sales in developing markets like the Netherlands, Belgium, France, Greece and Korea.
  • The company also made efficiency improvements in its production processes, which generally leads to lower overhead costs. As a result, Trina's gross margins rose to 27.2 percent from 20.1 percent in the third quarter and 23.3 percent in the year-ago period.
  • In 2008, Trina is determined to "lower our module manufacturing costs through constant improvements in cell efficiencies, wafer thickness reduction, and manufacturing process innovation," he added.
  • The Company anticipates its geographic breakdown of 2008 sales in its main markets to be approximately 34% Germany, 26% Spain, 18% Italy, 10% Benelux and 5% in the United States.
  • In the first quarter of 2008 the Company initiated commercial production of 180 micron monocrystalline wafers and cells from a current thickness of 200 microns and multicrystalline-based wafers of 200 microns from a current thickness of 220 microns. The Company expects to produce monocrystalline wafers of 160 microns and multicrystalline wafers of 180 microns by year end.
  • In 2008 the Company is developing second generation cell technologies to raise its monocrystalline and multicrystalline conversion efficiencies up to 17.5% and 16.0%, respectively.
  • In the fourth quarter of 2007 the Company's manufacturing cost per watt excluding polysilicon was approximately $1.28 for combined ingot, wafer, cell, and module production. By fourth quarter 2008, we are targeting cost reduction of approximately 18% to reduce these costs to approximately $1.05 per watt.

Some comments on their polysilicon plant which they gave very vague data about and "surprised" investors with last quarter

  • With goals to secure visibility on supply, price, and quality of up to 50% of its long-term polysilicon requirements, the Company is advancing project planning and financing to build and operate a multi-phased polysilicon production facility announced in the fourth quarter of 2007. We are highly confident that the construction of a polysilicon facility is the appropriate strategic direction to enable our vertically integrated platform to drive the necessary cost reductions to secure a sustainable competitive advantage in the global PV module market space.
  • We have made good progress in several areas in regard to our silicon production project announced in the fourth quarter. In December we announced our strategic development agreement with the Lianyungang Municipality in China's Jiangsu Province, which includes attractive government support in respect of land and electric power. We have also advanced negotiations for long lead time equipment and engineering procurement contractor (EPC) services. Additionally, we have well-progressed our technical and commercial due diligence work for a long term syndicate debt facility associated with the project.

So if read between the lines it sounds like they will fund this with debt instead of equity which was another concern I had (equity dilution).

Again, this appears to be the breakthrough quarter for Trina when many of their initiatives are finally coming together. While the high cost of polysilicon is still hurting the sector (save First Solar), Trina Solar has a lot of company specific initiatives that seem to be helping them offset the macro issues in the solar industry.

Long Trina Solar in fund and personal account


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